Mahogany Partners, a consortium of floor brokerages on the New York Stock Exchange, would like to reclaim blocks for the mid-tier firms that once made their living executing primarily large trades at the Big Board.
The New York-based consulting firm is managing a consortium of 12 brokerages that have banded together with the idea of using their negotiation skills to interact electronically with block liquidity residing on each other’s order management systems and in block dark pools. These firms trade all listed securities.
Mahogany has arranged with BNY ConvergEx Group to build "blotter-polling technology" and an interface that allows its member firms to seek out block trades with one another and specific dark pools. "This will radically change the way these brokers access block liquidity," said Gregory Johnston, CEO of Mahogany Partners.
The NYSE used to be the heart of the block-trading universe. But that changed with Regulation NMS and the dispersion of NYSE-listed liquidity to other venues. Now, these firms are turning to technology to expand their role handling blocks quietly for institutions.
"We represent this group of traders that have great intellectual capital and clear ideas about how they can make block trading more efficient in today’s modern technology-driven market structure," Johnston said. The firms in the consortium, which include Kabrik Trading and Farina and Associates, are typically midsize firms that emerged from the floor, have expertise trading blocks and the relationships to support it.
The selling point, however, is the same. "They’re pure agents," Johnston said. "They’re not trying to take a piece of the transaction or make the spread. They’re working on behalf of their clients."
Andrew Levine, a managing director at BNY ConvergEx, said his firm is building blotter-polling technology and a companion blotter, or front end, to allow Mahogany’s member firms to "interact with one another, access the ConvergEx Cross [dark pool] and eventually access block liquidity in other dark pools." The brokers will be able to electronically trade with one another and with blocks from ConvergEx Cross in the first quarter of next year. Access to other pools is planned for the next phase of the technology.
The premise of this arrangement is that the consortium members represent institutional investors and therefore have large orders sitting on their OMSs. After spending years trading with each other on the NYSE floor as agents, they trust the group they’ve formed to build a system that protects their order individual order flow even as it seeks to aggregate their liquidity.
Buyside firms are used to having their blotters "scraped" or electronically accessed by operators of dark pools such as Liquidnet, which use the information to try to match up orders. Sellside firms, however, have so far not ventured in that direction. The "blotter polling" that ConvergEx does is a mechanism that, like scraping, enables the system to determine what orders are sitting in an OMS.
Barry Larkin, head of trading and sales at Kabrik Trading, said his firm and other brokers in the consortium are comfortable with the idea of having their blotters polled as long as it’s anonymous and done safely by a trusted source. "No one can tell who it is [signaling you]," he said. "You get indications of interest, so you’re in control, and the system can’t be gamed." Kabrik, a 25-person firm, does about three-quarters of its business in New York stocks and the remaining quarter in Nasdaq-listed securities.
If the contra-sides whose blotters are polled meet in the Mahogany system, both parties get pop-up messages asking if they want to trade. The minimum is 10,000 shares unless one side has a higher minimum. After the initial execution, the two sides can negotiate for larger size.
In September, Mahogany set up an arrangement that gives the consortium members access to BlockCross, a dark pool operated by Pulse Trading. Johnston said Mahogany is leveraging the order flow and resources of its member firms to establish alliances with dark pools. Collectively, he said, the firms represent a lot of liquidity and have greater negotiating power.
"We’re assisting them in defining their requirements and getting them access to block liquidity venues," he said. "In return, the venues get access to their collective order flow." Dark pools that work with the Mahogany consortium are strongly encouraged to migrate their prints to the FINRA/NYSE trade reporting facility. This is important to the consortium members, Johnston said.